Markets treading water until election results

Americans nationwide are anxiously awaiting the results of tomorrow’s presidential elections, and it follows that the markets are too. Randy Frederick, managing director of active trading and derivatives at Charles Schwab, predicts that the markets will “tread water” and maintain their sideways pattern until after the results are in.

In a new analysis, Frederick says that although the SPX “hit a brick wall” last week at a 50-day simple moving average (SMA) of 1434, it has remained just above 1400, a psychologically important level, and has also stayed above the 200-day SMA of 1379.

With about 75% of S&P 500 companies reporting earnings, 60% have beat their earnings estimates, but less than 40% have beat expected revenue. Still, Frederick is optimistic that Q4 earnings could benefit from a reduction of uncertainty following the presidential election and an uptick in consumer confidence. “Companies that are sitting on, in many cases, large sums of cash feel a slight amount of certainty…they should be willing to spend some of that money. Consumers are likely to feel the same way,” he says, while also noting that “there’s a pretty good stage set for a decent holiday period.”

He also sees little risk of anything greater than a 10% pullback as long as the Federal Reserve continues its public support of the economy. “While a weak earnings season and the aftermath of Hurricane Sandy have caused a slight pickup in volatility recently, the VIX remains well below its long-term averages, and the futures continue to indicate little chance of any large volatility spikes by year-end,” he says.

In the near-term, Frederick foresees an uptick in the market, regardless of who wins the election. In the longer term, he continues to predict that the SPX will reach 1500 by the end of 2012.